The State

Insurance Fund Focus of Talks

SACRAMENTO — Statehouse negotiators, looking for a quick, relatively painless way to cut workers' compensation insurance premiums, have set their sights on a fat target: the government-run State Compensation Insurance Fund.

Gov. Arnold Schwarzenegger and four top legislative leaders, known collectively as the Big Five, met Sunday evening in the latest effort to craft comprehensive reform of the troubled workers' comp system.

The governor has said he will take a workers' compensation initiative to the ballot in November if legislators don't send him a workable plan by the end of this week.

Schwarzenegger spokeswoman Margita Thompson said that the 90-minute talk "made progress," and that the governor and legislative leaders are still hoping to craft a deal.

As the search for a compromise continues, Republican and Democratic lawmakers appear to be in agreement that the State Fund, a not-for-profit behemoth, could single-handedly drive down rates with the right enticement from lawmakers.

Over the last few days, staff experts from the governor's office and the Legislature have been studying a proposal to junk a 2-year-old law that requires the quasi-governmental fund to follow the same standards for capitalization and financial solvency reviews that are required of private insurance companies. Eliminating such so-called risk-based capital standards would allow the State Fund to lower its current $11 billion in reserves and cut rates to its customers.

Staffers working on the negotiations estimated that the change in standards, if implemented as part of a workers' compensation reform package, could cut employers' premiums by at least $159 million a year.

A cut in rates by the State Fund, which controls 50.5% of the market with $5.5 billion in written premiums in 2002, could be followed quickly by private insurers, analysts said. The private sector controls about 30% of the market; self-insured large employers account for the remaining 20%.

"State Fund is the market right now. It's the 800-pound gorilla," said Mike Mattoch, a lobbyist for the American Insurance Assn., an industry group. "By just changing how they are reviewed [financially], you could reduce premium rates and give immediate relief to small and medium-sized companies."

The State Fund rate-cut plan appears to be one of the few main areas of agreement in talks between Schwarzenegger and the legislative leaders, say people close to the discussions.

The negotiations are hung up on disagreements about how to calculate benefits paid to injured workers for permanent, partial disabilities; how to create "objective" medical guidelines for deciding on proper treatment programs; and how to differentiate workplace injuries, such as bad backs, from health problems that occurred off the job.

Also on the table is a demand by Democratic lawmakers that the government impose at least a modest amount of rate regulation on private insurers. Labor unions want guarantees that savings generated by reforms are passed along to business owners and not pocketed by insurance companies.

Insurers and most Republican lawmakers counter that government-imposed rate cuts would drive companies out of the California market and make employers even more dependent on the State Fund.

What's more important is finding quantifiable savings in the $22-billion-a-year workers' compensation system, said Senate Minority Leader Jim Brulte (R-Rancho Cucamonga), one of the Big Five. "You have to have a healthy, dynamic competition in the insurance market," he said. And tinkering with the State Fund's rates "deals with the symptoms and not with the problem of bringing more capital" into the insurance industry in California, he said.

The State Fund, for its part, would welcome relief from the risk-based capital review requirements. However, the company would not speculate on what savings that might create, said spokesman Jim Zelinski.

Democratic Insurance Commissioner John Garamendi, meanwhile, warned that eliminating the review process would strip him of a "tool of discipline."